Signing a lease for your restaurant business is a major financial commitment. It is important to have a clear understanding of your rights and obligations before signing a lease. There are many factors to consider when entering a lease for a particular premises, including the average market rent, the costs of leasing and your business requirements.
Restaurants will typically be faced with entering a lease when either:
- Considering leasing new premises for the business, or
- Buying an existing business and having the restaurant lease transferred for the remaining duration of the lease term.
It is important to research the market in the area you are looking at for establishing your restaurant. This includes looking into the average rents in the area and the lease terms being offered on the market. You may also want to consider any incentives landlords are providing to encourage tenants to enter leases and the current vacancy rate in the area.
Terms of the Lease
The terms of the lease set out the lessee and lessor’s rights, obligations and liabilities. Key terms include the duration of the lease, permitted uses under the lease and rent.
- Duration of the lease
Consider the length of time you need to lease the premises to recover costs and make a profit. It may be necessary to negotiate an ‘option’ if you want a shorter lease term, with the ability to secure a longer term if the business works out.
- Permitted uses
This describes the type of business the lessee may run from the rental property. Before signing a lease, check the local council requirements for the area where you plan to rent. Written consent from the council may be required for the type of business you plan to operate. In addition, any building work you have planned for the premises, such as a fit-out, may need development consent.
If council approval for building work is required, consider the time it will take to get the development approval and complete the work. There will be a period in which your business will be incurring costs but not generating any money. Therefore, it may be worth negotiating a rent-free period for the start of the lease with the lessor.
The duty to pay rent regularly is a key term in a leasing contract. In signing a lease, you agree to pay the rent for the full term of the lease. The initial rent under a lease is called the ‘base rent’. Additionally, the lease must set out when and how any change in rent is to happen.
Failing to pay rent has serious consequences. The landlord may take possession of the building, lock you out and still claim rent until another tenant is found. The landlord is under no obligation to reduce your rent or accept late payment if your business is going through financial difficulties.
Additional Costs of Leasing
Aside from rent, you should also consider if your business plan covers other costs, including the fit-out and outgoing expenses.
Lessees will usually be responsible for the costs of installing fixtures and fittings in the premises. Also, lessors may be responsible for some or all of the lessor’s costs of preparing the premises for fit-outs. Lessees must agree to the maximum cost of the lessor’s fit-out costs in writing before starting the lease.
Outgoings are the expenses of the lessor that the lessee agrees to pay under the lease. These can be major costs including fees for the management, operation, maintenance or repair of the premises. Examples of outgoing expenses include land tax, cleaning fees, council rates, water charges and utilities.
Running your own business is an exciting endeavour, but committing to a lease is a major financial commitment that requires research and preparation. You will save time, money and stress if you have an understanding of your commitments under the lease and ensure it works with your business plan.
If you need assistance with any aspect of leasing for your restaurant business, contact our team of commercial property lawyers by calling 1300 337 997 or via the contact form on this page.